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The “4% Rule” has guided retirees for decades, but its creator, William P. Bengen, now says it’s outdated.
In his new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,” Bengen introduces a more generous and flexible approach to retirement withdrawals, tailored to today’s volatile economy.
Here’s how to retire richer, according to the man who wrote the rulebook.
Choose the Right Retirement Withdrawal Rate
It’s important to be realistic about the withdrawal rate you choose.
“My research suggests that ‘safe’ withdrawal rates are closely correlated with stock market valuation and inflation,” Bengen told GOBankingRates.
This means the higher the stock valuation, the lower your withdrawal rate should be and vice versa, and the higher the inflation rate, the lower your withdrawal rate should be and vice versa.
“The best time to retire is into a period of low stock market valuation and low inflation — neither of which apply to the current situation,” Bengen said.
Why You Can Safely Spend More Than 4%
The “4% Rule” specifies a first-year withdrawal of 4% of your portfolio value, augmented by cost of living increases each subsequent year, similar to Social Security.
“Although this rule was recently upgraded to 4.7%, it is still too conservative for the current environment,” Bengen said. “I recommend a rate between 5.25% and 5.5% for current retirees, although this could change based on stock market valuation and inflation expectations. The 100-year average is 7%, so we are still paying a price for high market valuations.”
Stay Invested — Even During Market Downturns
The stock market tends to trend upwards over time, so you shouldn’t panic sell during downturns.
“Don’t be scared out of stocks because of a bear market,” Bengen said. “Those kinds of events are incorporated into the determination of your withdrawal rate.”
If you tend to be more risk-averse, consider subscribing to a risk management service that recommends adjustments to stock exposure based on an assessment of market risk.
“This should reduce your losses, although the subsequent gains may also be reduced,” Bengen said.
Protect Your Nest Egg From Inflation
During levels of high inflation, it’s important to reduce your spending as much as possible, especially when you are living on a fixed income.
“The lesson learned from the 1970s inflation surge was that cutting expenditures immediately can help preserve your nest egg,” Bengen said. “Don’t delay. You can always increase spending later.”